krogias

The zero interest rate policy (ZIRP) will kill the banks. Falling interest rates help banks by increasing the value of their bond and loan portfolios. This is the well understood inverse relationship between discount rate and present value of a future sum. But you see keeping interest rates at zero does virtually nothing for the banks as rates cannot fall further. There is a short window where ZIRP is a positive but an "extended period" (in Fedspeak) is just slow death for the banks. During that short period, the banks are still collecting on portfolios constructed when rates were higher but as those higher-yielding assets mature, there is nothing comparable to replace them. We hear constantly how banks can just borrow at zero and invest in Treasuries - pocketing the difference. That would be fine if yields on Treasury debt were not low and falling along with everything else. The other problem is that this simplistic formula assumes that banks' operating expenses are negl...

Those of us from a certain age will recall a book about the failings of the education system called Why Johnnie Can't Read . Well, we're about to see the failings of the financial system exposed in similar fashion. The Fed has gone from "savior" that will "bail out the market" to talking tough on inflation and pointedly refusing to promise further rate cuts. So when did this happen and why? The first thing to note about the Fed is they don't actually determine interest rates. They have the ability to set the Fed Funds target rate but then they have to go out and defend it in the marketplace - just like any other private entity seeking to set an arbitrary price. The strongest tool they have in this price-fixing scheme is the aura of omnipotence that they have acquired over the years so few other players are willing to take them on. A wise Fed chairman knows this and sets the target close to the market rate to avoid a test of wills that he might lose...